Holding companies can be a great tool for successful small business owners. Holding companies, or Hold co.’s, provide business owners with an opportunity for additional asset protection and tax savings. Unlike Operating companies, or Op co.’s, holding companies are not used in active business and are not revenue producing. They are mostly used for tax purposes as dividends can usually be transferred between corporations’ tax free. This allows for operating companies and holding companies to work together for business owners.
What You Need to Know
Holding companies can offer your business an extra layer of protection. Assets sitting in an Op co. are vulnerable to creditors in the event that something happens to your business. Hold co. gives you a safe place to park surplus cash and non-essential cash. Since the hold co. isn’t active in business operations, it would not be subject to creditors.
As mentioned above, dividends can generally be moved from an operating company to a Hold co. tax free. This provides an excellent opportunity for business owners to set up an investment portfolio within the hold co. Dividends that are taken out of a corporation by an individual are often heavily taxed, leaving the business owner with significantly less capital than was in the Op co. By moving the dividends to the hold co. tax free, business owners have significantly more capital to work with to create and grow their retirement portfolio.
Qualified Business Shares
Every Canadian has $866,912 (Year 2019) capital gain exemption available to them on small business shares. In order to utilize the capital gains exemption, the shares of the business that are being sold must “qualify”. One of the criteria that the business must meet is that it cannot have too much cash in the operating company. Having a hold co. allows business owners to transfer excess cash from the operating company. As mentioned above, inter-company dividends are usually tax free. By using the hold co., business owners do not have to claim the excess cash personally. They can simple transfer it and set their business up for sale.
The Bottom Line
Holding companies can be a very effective tool for small business owners who wish to maximize their tax savings and creditor protection.